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Recently, the Securities and Exchange Commission (SEC) opened a bribery investigation into whether JP Morgan’s employment practices in China have violated the Foreign Corrupt Practices Act (FCPA), according to a confidential U.S. government document, reported by TheNew York Times.

The practice of hiring politically-connected bankers in China was widespread in the early to mid-2000’s. Investment banks have a long history of employing the children of China’s political leaders. One does not need to be a seasoned banker to realize that in a country like China, where relationships and personal connections play a key role in business decisions, close relationship to top government officials is certainly an advantage to gain business in China.

JP Morgan started a “Sons and Daughters” program in 2006 to hire well-connected candidates on a separate track from other ordinary applicants, according to interviews with the bank employees. The program was supposed to provide heightened scrutiny of the children of government officials to make sure these “sons and daughters” were properly hired.

According to the report, JP Morgan hired the son of the chairman of China Everbright Group, a state-controlled financial conglomerate. After such hiring, JP Morgan secured coveted engagements from Everbright, including investment banking advice concerning a stock offering by one of Everbright’s subsidiaries.

JP Morgan also hired the daughter of the former deputy chief engineer of China’s railway ministry through its Hong Kong office. Around the same time of such hiring, JP Morgan was awarded a contract to help China Railway Group, a state-controlled construction company, raise more than $5 billion in its initial public offering in 2007.

The FCPA prohibits giving, offering or authorizing payment of anything of value to a foreign official for the purpose of obtaining or retaining business, or gaining any improper business advantage. While it is not per se illegal to hire well-connected individuals, if a family member is being used to make an illegal payment of anything of value indirectly to a foreign government official, then a violation would probably result.

A foreign official would include an employee or agent of any business entity that is owned or controlled by a foreign government. Executives at China state-controlled entities such as Everbright or China Railway Group can be deemed foreign officials under the FCPA. Giving them anything of value directly or indirectly in order to obtain business or improper business advantage can run afoul of the FCPA.

Although JP Morgan has not been accused of any wrongdoing associated with such hiring practices, this case should definitely remind U.S. global companies of their hiring practices in China. For U.S. multinational businesses doing business overseas, it is increasingly important to ensure that their human resources and hiring practices are transparent and well documented and are in compliance with U.S. and local laws. Improper hiring practices can certainly raise red flags and draw negative attention from U.S. federal authorities.

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